In Search For The Ideal Marijuana Related Stock – Part I

First of all, a big thank you to everyone who commented on our initial article on Marijuana or who sent us an e-mail with advice about it. It leads us to believe that there are plenty of (potential) investors in marijuana related stocks searching for information.

Let’s start by looking at what exactly is driving this market and then use that information to select certain parts of the sector that have the best risk/reward ratio.

U.S. House Protecting States

What started the marijuana frenzy, and what continues to be its main driver, is the broader legalization in many U.S. states. Over 21 states and Washington DC have approved medical cannabis programs. Many other states are currently considering decriminalization of the drug or legalizing it for medical or recreational use.

To aid the states in their quest and to make the law less confusing, the United States House of Representatives recently voted in favor of blocking the federal government from interfering with states that permit the use of medical marijuana. The GOP-controlled House voted 219 in favor and 189 against. This sends a strong message to those who are still skeptical of the progress and the future of the medical marijuana industry.

“Congress is officially pulling out of the war on medical marijuana patients and providers,” said Dan Riffle, director of federal policies for the Marijuana Policy Project.

As a result, the legal marijuana market is estimated to grow 64% to $2.34 billion in 2014 from $1.44 billion last year according to a recent report by the cannabis investment and research firm Arcview Group.

Obviously, the U.S. states are eager to benefit from this growth. Colorado for example, the first state which allowed recreational marijuana, is expected to generate $134 million in tax revenues in 2014 from pot use.

Benefitting From the Take-off

So knowing that the industry is poised for significantly growth in the coming years, how can investors benefit from this fact? Well, as always the trick is to do your homework.

Luckily we’re getting some help from the Financial Industry Regulatory Authority (FINRA) and the SEC. The latter has temporarily halted or suspended eight companies active in the cannabis sector since early March for “manipulative transactions” and “unlawful distribution of securities”.

As a result, most of those companies now trade on the gray market, meaning that investors operate largely in the dark and can’t see recent bid or ask quotes. We advise not to invest in those stocks as it’s very risky and because there are better alternatives.

We’re also cautious about biopharmaceutical companies active in the medical marijuana space, because, in most cases, their research is still in a very early stage. And we all know these tests involve lots of uncertainty, take very long to complete and require lots of money.

So we’re ruling out the popular Cannabis Science, Inc. (CBIS – $0.12), a U.S. Company specializing in cannabis formulation-based drug development. Although the company, earlier this week, reported to be in its “strongest financial position in its history”, we tend to disagree. On March 31, 2014 it had less than $1 million in cash, while it recorded a net loss of close to $6 million in the first quarter of the year. We realize that a large chunk of that loss was due to increased stock compensation expenses, but with 836 million shares already outstanding, we feel the sensible limit has long been reached. In addition, no significant sales will be recorded by CBIS in the foreseeable future as its research is still in preclinical stage.

We’re also dismissing Nuvilex Inc (NVLX – $0.27), a company that’s conducting clinical trials for pancreatic cancer in Australia and the US, for the same reason. As of January 31, 2014, Nuvilex had an accumulated deficit of $52,229,316 and incurred a net loss for the nine months ended January 31, 2014 of $10,783,209. The Company requires substantial additional capital to finance its planned business operations and expects to incur operating losses in future periods.

In order to raise the necessary money, Nuvilex recently entered into a market offering agreement with Chardan Capital Markets, LLC, in which Chardan has agreed to use its best efforts to act as the company’s sales agent in connection with the sale of $50 million worth of Nuvilex’ common stock. At $0.25 a share that’s a whole lot of dilution.

We do like GW Pharmaceuticals (GWPH – $71.99), a British company listed on NASDAQ that received Fast Track designation from the FDA for its investigational cannabidiol (CBD) product, Epidiolex(R), in the treatment of Dravet syndrome, a rare and catastrophic treatment-resistant form of childhood epilepsy. However, GWPH has a market cap of $1.2 billion and as such isn’t suited for our website.

Next time we take in closer look at the growers and the suppliers of materials used in the pot industry.

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